USD/JPY Forecast: Sustained gains likely if US GDP triggers an upside break on the yield curve

Omkar Godbole FXStreet Contributor

USD/JPY clocked a low of 110.78 on Thursday before rising to 111.71 only to surrender major part of gains to end the day with moderate gains at 111.27 levels. The Treasury yield curve steepened/spread between the 10-year yield and the 2-year yield rose from 0.93 basis points to 0.95 basis points.

All eyes on US Q1 GDP release

The BEA's advance estimate of Q2 GDP due at 12:30 GMT today is expected to show the economy grew by 2.5% q/q. The data will either add credence or deny Fed’s claim that the Q1 slowdown was transitory. The preliminary estimate is the most inaccurate (subject to revisions), but usually yields the biggest reaction in the market.

The growth in the core PCE is seen slowing to 0.8% q/q in Q2 vs. 2.0% in Q1. The employment cost index is expected to print at 0.6% vs. 0.8% in Q1.

What to watch out for -

Headline GDP print: A strong number could yield a steeper yield curve and result in a broad based USD rally
Consumer spending: Strong consumer spending would be good news for the US dollar. On similar lines, a better-than-expected core PCE and employment cost index would boost the USD
Yield curve: Keep an eye on the yield curve - difference between the 10-yr yield and the 2-yr yield. Moreover, the yield curve would tell us if the market believes in (strong) GDP data.

Sustained rally in the USD likely if the yield curve breaks above the descending trend line

Only a sustained break above the trend line hurdle of 1.0147 would add credence to strong GDP/core PCE data and open doors for a broad based rally in the US dollar.
The chart above shows rising bottom formation… expect USD sell-off to gather pace if the spread drops below 0.88.

USD/JPY Technicals

Resistance

111.20 (4/1 Gann fan line)
111.56 (100-DMA) - 111.64 (50-DMA)
112.03 (4-hour 200-MA)
112.32 (38.2% Fib R of 108.80-114.49)

Support

110.98 (61.8% Fib R of 108.80-114.49)
110.62 (July 24 low)
110.235 (May 2017 low)
110.00 (psychological level)

Daily chart

View

Following the confirmation of the bullish reversal on Tuesday, the upticks have been met with fresh offers. Thus, one may vouch for a sell-off to 110.00 levels however; it is worth noting that Monday’s Doji candle low of 110.62 has remained unchallenged…
Dips below 110.98 (61.8% Fib) have been short lived this week.
Thus, it is safe to assume the bears stand exhausted and the spot is on track to revisit the upward sloping 200-DMA level of 112.01.
Expect the pair to end above 200-DMA if the yield curve/diff. between the 10-yr yield and the 2-yr yield breaks above the descending trend line hurdle.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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